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    Chapter 1 - Red. of Pref - Shares 2

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    hanumanthaiahgowda
    1. Redemption of preference shares involves the repayment of redeemable preference share capital to shareholders either at the company's option or upon expiry of a fixed period as outlined in Section 55 of the Companies Act, 2013. 2. Only fully paid preference shares can be redeemed either at par or at a premium but not at a discount, using proceeds from a fresh share issue or divisible profits. 3. If redeemed using divisible profits, an equal amount must be transferred to a capital redemption reserve which can only be used to issue bonus shares.

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    Chapter 1 - Red. of Pref - Shares 2

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    hanumanthaiahgowda
    461 views4 pages
    1. Redemption of preference shares involves the repayment of redeemable preference share capital to shareholders either at the company's option or upon expiry of a fixed period as outlined in Section 55 of the Companies Act, 2013. 2. Only fully paid preference shares can be redeemed either at par or at a premium but not at a discount, using proceeds from a fresh share issue or divisible profits. 3. If redeemed using divisible profits, an equal amount must be transferred to a capital redemption reserve which can only be used to issue bonus shares.

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    Chapter 1- Red. of Pref.Shares 2

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    1. Redemption of preference shares involves the repayment of redeemable preference share capital to shareholders either at the company's option or upon expiry of a fixed period as outlined in Section 55 of the Companies Act, 2013. 2. Only fully paid preference shares can be redeemed either at par or at a premium but not at a discount, using proceeds from a fresh share issue or divisible profits. 3. If redeemed using divisible profits, an equal amount must be transferred to a capital redemption reserve which can only be used to issue bonus shares.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    461 views4 pages

    Chapter 1 - Red. of Pref - Shares 2

    Uploaded by

    hanumanthaiahgowda
    1. Redemption of preference shares involves the repayment of redeemable preference share capital to shareholders either at the company's option or upon expiry of a fixed period as outlined in Section 55 of the Companies Act, 2013. 2. Only fully paid preference shares can be redeemed either at par or at a premium but not at a discount, using proceeds from a fresh share issue or divisible profits. 3. If redeemed using divisible profits, an equal amount must be transferred to a capital redemption reserve which can only be used to issue bonus shares.

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    of 4

    Redemption of Preference Shares

    Meaning:
    The process of repayment of redeemable preference share capital to the shareholders either at the option
    of the company or at the expiry of the fixed period of time is called redemption of preference shares.

    Legal requirements:
    Following important provisions regarding the redemption of preference shares are given under Section 55
    of the companies Act, 2013.

    1. No company listed by shares shall after the commencement of the Companies Act, 2013 issue any preference
    shares which are irredeemable.
    2. No company listed by shares shall issue preference shares which are to be redeemed after the expiry of 20
    years from the date of their issue.
    3. Only fully paid preference shares can be redeemed.
    4. They can be redeemed either at par or at a premium, but not at a discount.
    5. They can be redeemed only out of the proceeds of the fresh issue of shares (but not out of debentures) or
    out of divisible profits.
    6. If they are redeemed at a premium, the premium payable on redemption must be provided for out of
    divisible profits or securities premium, if any.
    7. If any shares are redeemed out of divisible profits, a sum equal to the normal amount of the shares so
    redeemed out of divisible profits must be transferred from the divisible profits to a separate reserve account
    called “Capital Redemption Reserve Account”.
    8. The capital redemption reserve can be utilized by the company only for the purpose of issuing fully paid
    bonus shares to the members.
    9. The redemption of preference shares by a company should not be taken as reduction in its authorized share
    capital.
    10. When a company redeemed its preference shares, it should have the power to issue shares up to the nominal
    amount of the shares redeemed.
    11. If the redemption of preference shares by a company is not in conformity with the above provisions laid down
    by the Companies Act, the company and every officer of the company who is in default is punishable with a
    fine which may extend up to one thousand rupees.

    Important points:
    Balances which can be transferred to Capital Redemption Reserve (divisible profits)
    a) Profit & Loss A/c balance
    b) Reserve Fund or General Reserve
    c) Dividend equalization fund
    d) Workmen’s Compensation Fund
    e) Employee’s Accident Fund
    f) Insurance Fund
    g) Debenture Redemption Fund/ Sinking Fund for Red. Of Debentures.
    h) Contingency Fund
    i) Investment Fluctuation Reserve
    j) Taxation Reserve
    Balances not available for transfer to Capital Redemption Reserve
    1. Capital Reserve
    2. Share Forfeiture
    3. Security Premium
    4. Profits Prior to Incorporation
    5. Development Rebate Reserve

    Accounting treatment
    Step I: Call the uncalled amount, if any
    If shares are Partly paid up, pass the following journal entries to make them eligible for redemption
    because only fully paid shares can be redeemed.

    1. For making the call for uncalled amount:


    Preference Share Final Call A/c Dr.
    To Preference Share Capital A/c
    2. For receiving the call money:
    Bank A/c Dr.
    To Preference Share Final Call A/c
    Step II: 1. Fresh issue of Shares.
    a) At Par
    Bank A/c Dr.
    To Share Capital A/c
    b) At Premium
    Bank A/c Dr.
    To Share Capital A/c
    To Securities Premium A/c
    c) At Discount
    Bank A/c Dr.
    Discount on Issuer of Shares A/c Dr.
    To Share Capital A/c
    2. Any fresh issue of debentures
    a) At Par
    Bank A/c Dr.
    To Debentures A/c
    b) at Premium
    Bank A/c Dr.
    To Debentures A/c
    To Securities Premium A/c
    C) at Discount
    Bank A/c Dr.
    Discount on Issue of debentures A/c Dr.
    To Debentures A/c
    3. Sale of any asset
    a) At Cost price/Book value
    Bank A/c Dr.
    To Concerned Asset A/c
    b) At Profit
    Bank A/c Dr.
    To Concerned Asset A/c To
    Profit and Loss A/c
    c) At Loss
    Bank A/c Dr.
    Profit and Loss A/c Dr.
    To Concerned Asset A/c

    Step III: Premium payable, if any, on Redeemable Preference shares


    a) Premium is provided out of securities premium
    Securities Premium A/c Dr.
    To Premium on redemption of preference shares A/c
    b) Premium is provided out of divisible profits
    Divisible profits A/c Dr.
    To Premium on redemption of preference shares A/c
    c) Premium is provided out of securities premium and divisible profit
    Securities Premium A/c Dr.
    Any of the Divisible Profits A/c Dr.
    To Premium on Redemption of Preference Shares A/c

    Step IV: Creation of Capital Redemption Reserve


    Any of the Divisible Profits A/c Dr.
    To Capital Redemption Reserve A/c

    ** If liquid assets are not available for making payment to Pref. Shareholders’ on redemption, then either
    current assets may be sold by the company or bank loan may be arranged.

    a) If current assets sold


    Bank A/c Dr.
    Profit and Loss A/c Dr. (if there is loss on sale of Current Assets)
    To Current Assets A/c
    To Profit and Loss A/c (if there is profit on sale of Current Asset)

    b) If Bank loan raised, if any. (when sufficient cash/bank balance not available for repayment of
    preference shares)

    Bank A/c Dr.


    To Bank Loan A/c
    Step IV: Actual Redemption of Preference Shares
    1) For the transfer of redeemable preference share capital to Preference shareholders’
    A/c

    a) At Par
    Redeemable Pref. Share Capital A/c Dr.
    To Redeemable Pref. Shareholders’ A/c

    b) At Premium
    Redeemable Pref. Share Capital A/c Dr.
    Premium on Red. Of Pref. Share Capital A/c Dr.
    To Redeemable Pref. Shareholders’ A/c

    2) Actual Payment
    Redeemable Pref. shareholders’ A/c Dr.
    To Bank A/c

    *If Capital Redemption Reserve A/c is utilized for issuing fully paid bonus shares.

    (i) When decision is taken to issue bonus shares


    Capital Redemption Reserve A/c (or) Securities Premium A/c (or) Any other Reserve Dr.
    To Bonus to Equity shareholders’ A/c

    (ii) When issue of Bonus shares is made

    Bonus to Equity shareholders’ A/c Dr.


    To Equity share capital A/c

    Important Notes:
    1. If the preference shares to be redeemed are not fully paid up, the uncalled amount on such shares has first
    to be called up and collected. Only then such shares may be redeemed.
    2. If it is mentioned that preference shares are redeemed, but new issue of shares for this purpose is not
    given, it may be assumed that the company has sufficient profits.
    3. ‘Proceeds of fresh issue’ do not include issue of debentures.
    4. Premium received on fresh issue of shares for the purpose of redemption of shares shall not be considered
    as proceeds of fresh issue.
    5. Share holders are not traceable:
    a. If premium payable on these shares, we can provide premium on such shares along with the premium
    payable on the redemption of other preference shares.
    b. While creating the CRR out of divisible profits, the nominal value of these non-traceable shares also
    can be taken along with the nominal value of the other preference shares redeemable.
    c. However, while passing the entry for the transfer of the redeemable preference share capital and
    the premium payable to the preference shareholders’ account, we should not take into account the
    share capital and the premium on redemption in respect of the preference shares whose holders could
    not be traced.
    d. While passing the entry for the actual payment to the preference shareholders, the amount due to
    the preference shareholders who could not be traced should not be taken into account.
    e. In Balance sheet: Amount of share capital (non-traceable) under the head Share Capital as
    ‘Redeemable Preference Share Capital Account’
    Amount of Premium (on non-traceable) under the head Reserves and Surplus as ‘Premium on
    Redemption of Preference Shares’.
    6. Calls in arrears on redeemable Preference Shares:
    In such a case, the steps suggested above can be followed (in case of shareholders are not traceable).

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